The Banana File Part II : Chiquita Int. in Honduras

Chiquita SECRETS Revaled: Power, money & control
Hidden control crucial to overseas empire

Publication: Cincinnati Enquirer
Date: May 3, 1998
By: MIKE GALLAGHER AND CAMERON MCWHIRTER
———————————————————————

Chiquita Brands International Inc., through its subsidiaries, secretly
controls dozens of supposedly independent banana companies in Latin
America.

Chiquita does so through an international trust structure designed to
avoid restrictions of land ownership and national security laws.

Records obtained by the Enquirer show that Chiquita’s executives and
lawyers created the trust structure in 1991 and 1992 so the company-
controlled entities could:

Acquire land in Latin American countries for expanded banana
production – even though those nations’ laws prohibit and – or limit
Chiquita from directly buying property.

Buy land in Honduras within 40 kilometers of its borders despite laws
that – for national security reasons – prohibit non-Hondurans from
owning such land.

Eliminate labor unions from many company-controlled banana farms or
hinder their activity by forming smaller, supposedly independent
companies that appear to be controlled by citizens of the host
countries.

Chiquita used the trust structure to replace an older system also
designed to hide control of many of its Latin American
operations. That system is known as a “nominee form of ownership.”

Under the nominee system – still widely used in some areas – citizens
of the host country are made shareholders of the companies and then
secretly sign over their shares in blank and give them to Chiquita,
company records reveal.

Obtaining land to expand its banana production operations in Honduras
and other Latin American countries throughout this decade has allowed
the Cincinnati-based banana giant to maintain its position as the
world’s largest banana company.

“What Chiquita has done to these foreign nations is deception on a
world- wide scale,” said Larry Birns, director of the Council on
Hemispheric Affairs (COHA), a Washington D.C. based research group
specializing in Latin American issues.

“Violating the intent of these foreign laws is considered a very
serious matter in Latin America,” said Mr. Birns. “The problem has
always been proving it.”

Mr. Birns’ research on Latin America has been used by Congress, the
U.S. State Department and U.S. and foreign embassies. He was critical
of Chiquita in recent COHA reports. He supports allegations by Ernst
“Otto” Stalinski, a former employee of a competing banana company who
has filed a U.S. federal lawsuit claiming that Chiquita and subsidiary
officials tried to kidnap him in 1990.

Carl H. Lindner Jr., chairman of the Chiquita board and chief
executive officer; Keith Lindner, vice chairman; Steven G. Warshaw,
president and chief operating officer; and other Chiquita officials
declined repeated requests for interviews.

Instead, the company hired the law firm of Kirkland & Ellis to
represent the company in all dealings with the Enquirer. Through its
lawyers, Chiquita provided written responses to Enquirer questions but
declined to provide information on any foreign companies owned or
controlled by Chiquita.

Trust structure created

Honduras was the first country in which Chiquita used its trust
structure to obscure its control of the banana farms. Chiquita was
seeking to expand its operations for greater sales in Eastern Europe.

A 1992 Chiquita document entitled “Honduras Operations, Legal
Structure Description and Rationale” describes why the company created
the trusts and noted the Honduran laws the company considered to be a
problem.

The document said that historically all banana operations were under
Tela Railroad Co., Chiquita’s Honduran subsidiary. Because of Honduran
land laws, expansion of these holdings was not allowed.

The Honduran Constitution doesn’t permit foreign land ownership within
40 kilometers of the border. The Honduran Agrarian Reform Law of 1976
does not allow land ownership greater than 250 hectares (about 618
acres), with a grandfather clause for all land owned prior to 1975,
the document said.

The Honduran government can expropriate land that is owned or
controlled in violation of the law. Additionally, any land that stops
producing crops can also be expropriated. Honduras did expropriate
more than 50,000 acres of Tela Railroad Co. land shortly after the law
was passed because the land was not in production, according to
Salvatore Rodezno, former deputy minister of political affairs at the
Honduran embassy in Washington D.C.

As token compensation, the government paid Tela a small amount of cash
and low-interest bonds, according to an April 12, 1989 memo by
Chiquita lawyer Manuel Rodriguez.

Referring to the trusts, another Chiquita legal document stated: “The
new managed farms are being set up as a trust under ( Chiquita
International Limited) because they are easier to set up and manage
and (they) provide a greater confidentiality than the nominee
structure.”

Chiquita executives and lawyers who spoke confidentially to the
Enquirer said Mr. Warshaw, Chiquitas’s current president and chief
operating officer, authorized the international trust structure.

Several high-level Chiquita employees said they expressed concern
about the trust structure in 1991-92, but their opinions were
disregarded. They asked not to be identified for fear of retribution.

“Steve (Warshaw) said we were only using loopholes in their laws to do
what we wanted,” said a Chiquita lawyer opposed to the trust
set-up. “This has never sat well with many of us.”

Again, Chiquita’s officials declined to comment regarding foreign
companies owned or controlled by Chiquita.

Plans revealed

The web of Chiquitas’s international trusts is detailed in scores of
internal company records from high-level sources within Chiquita.
Those sources cooperated with the newspaper on a confidential basis.

Included in the records are copies of trust documents; legal memos,
reports and opinions; lists of Chiquita’s hand-picked shareholders;
letters and memos from officials of companies that set up the trusts
in such places as Liechtenstein and the Channel Islands; international
loan and finance information; company financial and product flow
charts.

Based on this information, conversations with sources inside and
outside the company and taped copies of internal Chiquita telephone
voice-mail messages, the Enquirer has documented this story and others
in this package.

Here’s what the newspaper has learned regarding the trusts.

With the breakup of the Soviet bloc in Eastern Europe, the company
wanted to restructure and expand its holdings so it could grow more
bananas for what it hoped would be a new market in Eastern Europe,
according to an April 12, 1989 internal report entitled “Honduras –
2,000 Hectares Project.”

Chiquita lawyers in Cincinnati arranged to have 30 Honduran trusts
established in 1991 and 1992 to create new companies to buy land.

The Honduran trusts were controlled by 20 overseas trusts set up at
the same time. Trust documents show that these overseas trusts are
controlled by Chiquita subsidiaries.

A trust is defined as a legal entity in which property or power is
entrusted for the benefit of another and is administered by a trustee.

A March 4, 1992, letter from Herbert Smith, a London firm hired to
help set up the Chiquita trusts, described how and why the trust
structure was being created.

“We have been instructed in connection with the establishment of 30
independent trusts in the Channel Islands by Chiquita International
Limited,” the letter stated. “Each trust forms part of a structure
which will ultimately acquire and hold land in Honduras. It is
intended that each trust will establish a trust arrangement with a
bank in Honduras to which funds will be transferred. The Honduran
Trust will acquire shares in a Honduran company which already owns or
will own land in Honduras up to 250 hectares.

“We understand that the reason behind structuring the ownership of
land in Honduras in this way is to comply with the restrictions on the
ownership of land imposed by Honduran law as to the nationality of the
owner as well as to the amount of land which may be owned.

“For the record, we wish to confirm our understanding that (we) are
not expected to advise and are not being relied on for any advice with
regard to the legality or the efficacy of the structures outlined
above with regard to Honduran law. We understand that legal advice has
already been obtained in Honduras on the basis of which Chiquita
International Limited is prepared to proceed with these arrangements,”
the letter stated.

The trusts are set up so Chiquita officials control decisions
regarding those companies. Under the trust structure, Chiquita reaps
the income and other benefits from the front companies.

Further, each trust specified that another layer of trusts in Honduras
would be set up with Honduran banks into which funds would be
transferred, according to Chiquita’s trust documents obtained by the
Enquirer. Those banks are the trustees of the Honduran trusts.

The trust trail

An example of how the trusts were formed can be found in the King’s
Mills Trust, set up Nov. 27, 1991, on the island of Guernsey in the
British Channel Islands. Think of the process as a stack of five
building blocks – all connected, but with the lowest block (the land
holder) three removed from the top block ( Chiquita) .

The King’s Mill Trust’s purpose was “for the benefit of Chiquita
International Limited,” the Bermuda-based subsidiary, according to
Chiquita’s trust records. Tax and banking laws make the Channel
Islands popular international tax and trust havens.

At the same time the King’s Mills Trust was established, a Honduran
trust was set up. The Honduran trust was administered by a Honduran
bank, “Banco Atlantida.”

Next, the Honduran trust became the major shareholder (99 percent) in
a newly created company owning land in Honduras. The other 1 percent
of that landholding company’s shares was split among four Honduran
citizens with ties to Chiquita or its subsidiaries. In that way, the
new company showed Honduran owners of record.

Using the building-block analogy, the landholding company is the
bottom block (block No. 5).

The Honduran trust (block No. 4) was controlled by the King’s Mill
Trust on Guernsey.

King’s Mill (block No. 3) was controlled by Chiquita subsidiaries
(block No. 2): Chiquita International Limited and Chiquita
International Trading Co.

“And our Chiquita International Ltd., and Chiquita International
Trading Co. people take their orders from right here in Cincinnati,”
(block No. 1) said a company lawyer involved in trust operations. The
lawyer added:

” Chiquita uses both an overseas trust and a Honduran trust so the
company has an extra layer of protection from anyone discovering we (
Chiquita) are really the beneficial owner and controller of those
supposedly independent banana companies in that country.”

Company records show that since 1991, Chiquita has used the same trust
structure dozens of times to purchase thousands of hectares of land in
Honduras. The purchases – using different trusts, shareholders,
trustees and banks – hid Chiquita’s control.

“Using more than one bank in Honduras and more than one country to
establish the offshore trusts further obfuscates the ownership of the
farms,” said a Sept. 20, 1991, letter from Chiquita finance executive
Susan F. Chappano (now Susan Brester) to Gerald R. Kondritzer,
Chiquita vice president and treasurer.

In addition to new land purchases in the early 1990s, thousands of
acres of Honduran farm land that Chiquita placed into the trust
structure were part of banana farm companies Chiquita already secretly
controlled through its ” nominee form of ownership.”

In planning the trusts, Chiquita looked for loopholes in the laws of
foreign countries, according to company sources.

On April 23, 1991, Chiquita executives and lawyers met in Miami to
review Honduran law and outline proposed corporate structures and the
method of acquisition from a legal, tax, accounting and operational
perspective, according to Chiquita records.

A May 8, 1991 memo from Enrique A. Miguez of McDermott, Will & Emery (
Chiquita’s outside law firm) outlined the meeting and listed company
executives and lawyers who attended. The memo noted that Chiquita
officials were told that Honduras’ laws did not specifically address
the issue of a foreign company being “beneficial owners of a
(Honduran) company.”

Noting Honduras’ national security law which prohibits foreign
ownership of land near its borders, Mr. Miguez wrote: “The company’s
proposed acquisition, which we were advised is mostly within the 40
kilometers of the country’s borders and located in the Lower Sula
Valley, must be structured to comply with Honduras law.

“The Agrarian Reform Law… limits the amount of land in certain areas
of the country that anyone, whether foreign or Honduran, may own…In
the Lower Sula Valley, the applicable limit is 250 hectares. Any
excess above the maximum amount of land permitted is subject to
expropriation by the National Agrarian Institute (INA), a government
agency. In addition, any portion of the land, if the total aggregate
exceeds the limitation, may be expropriated whether recently acquired
or not.”

The Honduran law was passed to ensure that foreigners or wealthy
Hondurans do not buy up the countryside. INA is supposed to
investigate individuals and companies who acquire land to make sure
they are abiding by the restrictions of the law.

However, in his memo, Mr. Miguez wrote: “Because Honduran law is
silent as to the beneficial owners of a company, it is the opinion of
Honduran counsel that the INA would look no further than the Honduran
bank acting as trustee with regard to ownership of the corporation.”

While the Honduran Commercial Code – laws dealing with businesses in
that country – does not specifically address foreign companies using
an international trust structure to avoid restrictions in the Agrarian
Land Reform law, two articles of the code refer to trusts.

Honduran Commercial Code Article 1035, translated from Spanish,
states: ” The trust implies the assignment of the rights or the
transfer of the ownership of the goods in favor of the trustee.”
Article 1036 states: “With respect to third parties, the trustee will
be considered as the owner of the rights or goods in trust.”

Honduras reaction

After the Enquirer described Chiquita’s trust structure and how
thousands of hectares of land were purchased – including land within
40 kilometers of its borders – Benjamin Zapata, political affairs
officer at the Hondurass Embassy in Washington, D.C., said that if
there is “irrefutable evidence” of Chiquita or any company trying to
“get around the (Honduran) law,” it should be investigated.

“If there were missteps done by an investor in Honduras, to go around
or find a loophole in the law, I am certain that the investigator of
the (Honduran) government – that we call like an attorney general –
that (he) might be the proper entity to look at this and make the
recommendation to the authorities,” Mr. Zapata said.

Honduran government leaders plan to review the Enquirer findings, he
added.

Honduran labor leaders ex-pressed outrage at Chiquita’s land dealings.

“This is fraud on the Honduran people and cannot be tolerated,” said
German Edgardo Zepeda. He is president of the Honduran labor
organization Coordinadora de Sindicatos Bananeros de Honduras
(COSIBAH). It coordinates the national unions that represent Honduran
banana workers, including those that work for Chiquita.

Iris Munguia, general secretary of COSIBAH, said “If Chiquita is the
real, secret owners of these companies, they are violating the intent
of our land and national securities laws and we will call for national
investigations and strikes by our workers.”

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